Biodiesel Boom Raises Ethical Issues -Analyst

KUALA LUMPUR (Dow Jones)--High crude oil prices may have galvanized bio-diesel production, but some questions are now being asked in industry circles about the ethics of using a limited edible resource to meet the world's energy needs, said an influential edible oils industry analyst.

Dorab E. Mistry, director of London-based Godrej International, said he opposes the practice of burning what is an essential food item and believes non-governmental organizations in Europe, where the bulk of the world's bio-diesel is produced, will soon raise their protests.

"The NGOs in Europe will realize the folly of burning an edible oil for fuel and get in on the act," Mistry said in an interview on the sidelines of the recent annual palm oil price outlook conference in Malaysia.

Even the need for cleaner-burning fuel sources for environmental reasons doesn't entirely justify the use of vegetable oils such as soyoil, palm oil and rapeseed oil, he said.

"Clearly, there are alternatives to reducing carbon emissions by using better technology and that is the way forward; not burning an essential edible oil," said Mistry, who has been involved in the trading of edible oils for more than 25 years for India's Godrej group.

Ambitious Targets For Bio Fuel Production

The European Union has been at the forefront of bio-fuel production, setting a target of replacing 2% of the region's fossil fuel requirements by end-2005.

Industry publication Oilworld has said the European Union's bio-diesel output could touch 2.4 million metric tons to 2.6 million tons in 2005, sharply exceeding the 700,000 tons produced in 2000.

The bulk of Europe's bio-fuels are derived from rapeseed oil. Oilworld estimated that close to half of all of the region's rapeseed oil output could go toward bio-diesel production this season.

It would be acceptable to burn edible oils for fuel in times of severely low prices caused by a glut to protect the interests of farmers and producers, Mistry said.

However, for edible oils, now isn't the time as the supply and demand are at a balance and prices are attractive for producers, he said.

"So for that reason, I would ask the people who are planning to use government subsidies for burning oil to go easy," he said.

Mistry forecast global edible oils supply and demand to grow at an even rate of about 5% in the year. Estimates from other edible oils analysts such as Oilworld and James Fry have also indicated marginal differential between supply and demand growth.

By subsidizing the production of bio-diesel, governments may be preventing edible oils from being put to better use, namely as food for the world's population, Mistry said.

"They are also subsiding ethanol from beet and corn, where there is definitely huge overproduction so, that can continue. But for vegetable oils, where there is a tight supply and demand situation, subsidies should be taken out."

Currency Changes May Spoil Bullish Mood

Meanwhile, Mistry said palm oil market players need to be cautious about the bullish price forecasts made by industry analysts at the annual price outlook conference held in Kuala Lumpur March 2-4.

Analysts, including Mistry, had forecast palm oil prices to range from about MYR1,300/ton to MYR1,500/ton in 2005.

At 0930 GMT, the benchmark May CPO contract was trading at MYR1,434/ton, up MYR46 from Friday's close.

While the projections point to further upside room, Mistry said market players shouldn't "get carried away."

That's because a revaluation in Asian currencies, including the Malaysian ringgit, may be possible in the coming year.

There has been persistent speculation since late last year that the Malaysian ringgit, pegged at MYR3.8 to the dollar, would be revised to a stronger rate if China revalues its currency, the yuan.

"I think it's generally accepted that if the yuan is re-valued, other Asian currencies which are also seen to be undervalued, like the ringgit, will also be re-valued," Mistry said.

"We have to take that into account that it will happen in the next 12 months."

A stronger ringgit would put downward pressure on the ringgit price of Malaysian CPO as there would be limited room for an adjustment in the dollar-denominated export price, he said.

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